JPMorgan's $2billion dollar trading loss, although small in relative terms, highlights potential risk from commercial bank trading activities. In this instance, the scale is only marginal. However, the fact the loss was isolated, and occurred in otherwise choppy market, with interest rates near lows, makes the potential scale for widespread losses more apparent. Take for example, if the loss was not isolated, and the market had been on a persistent upswing, as experienced in 2007. In these extraordinary cases, the losses can become exponentially higher, given the leverage in the system. Capital controls are vital to ensuring a healthy economy and minimizing the risk in the event of widespread panic of liquidity runs. The magnitude loss factor holds an additional constant factor, indicated by the speed in which investors move money from 'the good' institutions from 'the opaque' institutions, in the presence of asymmetric information. An example is moving money electronically from an institution, such as Wachovia, during the crisis, and moving to a credit union. The interconnected electronic accounts have a diverse impact on the banks underlying ability to manage capital, because in fact those assets could disappear over night from massive liquidity runs on assets.
The asymmetric information between commercial banks and regulatory agencies leans itself to a policy of isolating the assets and capital of investment banks from the parent company. Although, the capital markets division at JPM may not be able to take the loss without the assets of the parent company to back it. Trading divisions at major financial institutions play an important role in technological innovation, however, their ability to cause massive panic was only recently seen in the funneling of securities throughout the world via US mortgage assets. Moreover, as soon as a new innovation becomes widespread, leading to a economic cycle peak, the speed at which investors will be able to move money becomes an important factor in their ability to manage asset-capital ratios. The scale in this one event was small, but the potential impact is exponentially large in the presence of a pro-longed economic cycle coupled with asymmetric information and massive runs on liquidity.
The asymmetric information between commercial banks and regulatory agencies leans itself to a policy of isolating the assets and capital of investment banks from the parent company. Although, the capital markets division at JPM may not be able to take the loss without the assets of the parent company to back it. Trading divisions at major financial institutions play an important role in technological innovation, however, their ability to cause massive panic was only recently seen in the funneling of securities throughout the world via US mortgage assets. Moreover, as soon as a new innovation becomes widespread, leading to a economic cycle peak, the speed at which investors will be able to move money becomes an important factor in their ability to manage asset-capital ratios. The scale in this one event was small, but the potential impact is exponentially large in the presence of a pro-longed economic cycle coupled with asymmetric information and massive runs on liquidity.
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